Pay your rent and I'll give you the house, with Ike Udechuku

Imagine you rent your home.  Now imagine your landlord gave you a straight choice: (1) pay rent for forty years, renewing the lease biennially for the rest of your life, or (2) pay the same rent for thirty years at the end of which your landlord gives you the house.

Pick your answer, but don't tell me yet, because I have one more pair of choices for you, this one from the funding side of things.

This time I want you to imagine yourself as an investment manager at a pension fund with £1 billion to invest, would you rather place it in (1) a 40-year gilt to earn an inflation-adjusted return of zero or (2) buy the right to receive monthly rent from a club of motivated renters that give you an inflation-adjusted yield of two or three per cent for forty years?

OK, now let me guess... hmmm, you picked two and two, right?

Yeah, I'm not a genius for knowing that. It's simple. And yet... also quite complicated. My first degree was in structured finance, so I really should have a handle on this bond pricing stuff, and how to split income streams from asset growth, but when I went from university into lending instead, I promptly forgot it all.

My guest today, Ike Udechuku, has no such blind spot. With a, frankly astonishing, track record in the bond markets and a passion for property and property management, he looks perfectly positioned to shake up these two huge industries with Pathway Points - which will give both investors and renters a way to answer 'two' to those simple questions.

You can learn more about Pathway at https://thepathway.club/ (which includes some great little video clips explaining the process), but you should also follow them on LinkedIn (https://www.linkedin.com/company/pathway-points/) where they publish regular insights

If you're an investor and would like to kick the tyres a bit, you can reach out to Ike on LinkedIn to start a conversation: https://www.linkedin.com/in/ikeudechuku/

We mentioned Ampersand House, and if you'd like to see more of that, check out this great article from 2017: https://www.architecturaldigest.com/story/ampersand-house-everything-is-for-sale

Ike mentions Sharia mortgages in our conversation. In episode 88 of this show, Abdullo Kurbanov explains murabaha in more detail

This session was recorded in Brown Bear Studios, Brighton: https://brownbearaudio.co.uk/

You can learn more about myself, Brendan le Grange, on my LinkedIn page (feel free to connect), my action-adventure novels are on Amazon, some versions even for free, and my work with ConfirmU and our gamified psychometric scores is at https://confirmu.com/ and on episode 24 of this very show https://www.howtolendmoneytostrangers.show/episodes/episode-24

If you have any feedback, questions, or if you would like to participate in the show, please feel free to reach out to me via the contact page on this site.

Regards,

Brendan

The full written transcript, with timestamps, is below:

Ike Udechuku 0:00

With something that's purely digital, such as finance, it's incumbent upon the industry to look at the fact that you can change infrastructure and regulations really quite quickly. If you can agree to do so, that agreement could be in the blink of an eye.

And when you have the kind of business model that we have, I've been saying to people 'if you just took a clean sheet of paper, and arrived and looked around at the way the world actually is, and then built rules around that, and studied it and then threw in a little bit of money, like a billion pounds, a small amount, because it's home finance it has to start at that scale, then you'd be able to do extraordinary things.

And people would say, oh, no, no, don't load too many features onto this. And you know, the story of Pathway is that we're saying 'we're going to do just one thing'. When I describe it, people think we're trying to do 15 things. No, we're gonna do one thing, it just that life is complex!

Don't ask me for the simple version. People live complex lives, I'm going to help them about one thing, that complex life. So that is the simple version.

Brendan Le Grange 1:04

Well, I think we've got the the intro snippet right there, so let's jump into the interview proper.

I haven't done this entirely scientifically, but I hope you'll bear with me. I was scrolling the property websites this morning, I found a two bed two bath flat for sale in South Croydon, London at £695,000. I also found a similar flat in the street next door renting for £2,200 a month. Now for the sake of simplicity, I'm just going to assume those are the same flat for the moment.

If you were to rent that flat for 25 years, which is the average term of a new British mortgage, you would end up paying your landlord significantly more than the purchase price, even on an inflation adjusted basis.

So just buy the flat yourself, right?

But there's a big affordability problem here. Remember, the rentals are inflation adjusted. So they're always rising - at a 3% CPI, the £2,200 a month you pay today becomes £3,000 a month by year 12, becomes nearly £4,500 a month at the end of your term. Your mortgage, meanwhile, is steady.

Which is a long way round of saying, and I'm skipping some points, but basically, if £2,200 a month was all you could afford to pay in your budget, you would need to put a down payment of £250,000 on that flat to get your payments low enough. And needless to say, not every homebuyer has that sort of cash laying around.

But that's the only difference, right that access to capital.

If you have it, you can therefore pay for the home on a steady scale. Then not only do you have a place to stay for 25 years, not only do you pay less overall, but you end up owning the underlying asset. And you benefit from years of tax deductions and credit score to boot.

If you don't have that capital, and you therefore have to pay for the house on an escalating scale, you get none of those benefits, which sounds a bit all or nothing for the single biggest transaction in almost all of our household budgets, but maybe not for long. Welcome to How to Lend Money to Strangers with Brendan Le Grange for one of the most exciting stories I've recorded so far.

Ike Udechuku, welcome to How to Lend Money to Strangers, today we're recording in Brown Bear studios in the heart of what is hopefully still a sunny Brighton when we leave. For me as an enthusiastic amateur, I recorded all 80-odd of my previous episodes by myself, it's a little bit intimidating to be surrounded by actual professionals, but also a big treat.

And in some ways, it's a bit similar to be talking to someone with your track record, a huge treat, but also a little bit intimidating!

So you are here to talk about Pathway which is this hugely ambitious project that's going to be disrupting not just two marketplaces, but two really important, really big marketplaces being pensions and homeownership or rentals.

So, yeah, I'm itching to get into that, but before we do, as I said, you've got this background that's really impressive but also quite exotic, so let's not skimp on talking about that.

Ike Udechuku 4:26

I think if you looking for a founder's origin story, one that collides with the topic of the day, you go back to relationships and precocity. When I was a teenager, I had a personal crisis: my mother died when I was 17.

But I was also one of these kids who was pushed forward in the education system in a very African way, of pushy African mother. When we arrived in Australia, the timing of British education year end for schools and starting in Australia with mismatched so she said my son must go forward because it's a shame on the family if a son goes back in school, from the Nigerian mother's perspective. So I ended up being two years younger than most of my peers in high school (oh, because you start a year earlier). Yes, it started a year earlier.

And then I moved from Western Australia to the east coast where people start even later. So I was three years younger than everybody around me. And so when my mother died at 17.

I was most of the way through an economics degree. And halfway through a law degree at 17, running errands for suburban lawyers who are transferring property. So going down to Land Reg, filing $100,000 property transactions at 17. And I was headhunted by the Australian Treasury a month before my 19th birthday, to work as a graduate economist, because I'd finished my degree by then.

And a year later, I was working with Morgan Stanley and Salomon Brothers and Nomura Bank, borrowing money for the Australian treasury to finance the deficit. So you just start with this precocious exposure to ridiculously large numbers and realise, zeros don't take up very many pixels on the screen or very much ink on the page. They're just numbers.

And that's that's kind of the guiding philosophy behind the new consumer brand that just says, well, it's just numbers, let's just talk to ordinary people about big numbers and just let them get used to it.

Brendan Le Grange 6:17

Yeah. And you can see when you're in that area, how finance people can become ungrounded, because it does just become numbers on the screen. But you've stayed very grounded, a lot of social impact work as well. And I think that's probably the challenge for somebody in that space is not to get lost in there, just another zero here or another zero there. And so you're saying when you running a country, the numbers get big very quickly.

Now, as I said, it's not just banking. I mean, the second half of your career has been more defined by founding and founding several times.

The first time I moved abroad, it was to move to Copenhagen to start a new job. Arrived in country. My first day at the office, I was gifted a lovely bouquet of flowers. And they were put in a little glass vase, which I took home to my wife who was at the hotel to pretty up the room. The vase it was in, I thought it was just the free vase that comes from the florists, little bit short to be practical, funny little shape, but it was the only thing we had, you know, we were in a service department. We didn't have anything else. So I took it and we used it.

We kept it when we moved into our first apartment in Copenhagen, and I packed it with everything else when we moved to Hong Kong... and only later found out talking to a friend and colleague from there, that that was the vase that everybody got flowers in, you're definitely were not supposed to take it home. It was an Alvar Aalto Finnish glass vase that was worth a few £100s that I accidentally stole and still own.

And actually, when we went to get Finnish visas for my youngest daughter, on the wall of the Finnish consulate in Hong Kong are the original sketches of the vase so it's now become a talking point.

That it's not a mistake you would have made because mid century Scandinavian design would century Scandinavian furniture and art is an area of passion of yours as well. So talk to me about Ampersand House.

Ike Udechuku 8:00

Well, Pathway is a bond market arbitrage, which means very little to most people but occasionally the bond markets crash and last year, we noticed that in Britain, even when you're looking at government bonds, but in 2007, when people talk about the 2008 crash was actually the 2007 bond market crash. I was working with Bank of America at the time and my world came to an end because my clients were banks, I was working for a bank that works with banks and on the bond market side big banks are falling out of the sky like Lehman Brothers and Bear Stearns.

So we ended up taking a role with a financial institutions focused private equity fund in Luxembourg that said, well, we need someone who can help us buy and sell asset management businesses and small insurance companies and consolidate them into a vehicle Luxembourg. And when I moved to the Benelux region, realised that there was massive properties. We'd left a small two bedroom place in Notting Hill at five or six years before that experience and Luxembourg. And these houses like the Spanish consulate and on Avenue Malia in Brussels were worth roughly the same as like a small two bedroom apartment in Notting Hill.

And at that point in time, Kathryn, my co-founder was working at King's College Teaching commercial law. And she had an experience coming across these 1930s library cabinets, beautiful oak cabinets with being thrown away, because furniture from the middle of the centuries is so, if you think about the 1990s, it's 60 year old cabinet, who needs the beautiful old cabinets? So she said I will take them home.

Somehow she got them on a truck, and they arrived. And we've had them ever since.

There's like a 1930s cabinet and an 1830s home and people said all that looks really good. And that sort of mixture of things which were no longer new, but which looks contemporary in an ambiguous way. You look at an Eames chair designed in the late 40s and it looks pretty much like it was designed yesterday. That was 80 years ago. So that moved us on to you know, Alvar Aalto and Arno Jacobsen and the whole gang.

People would ask us, can you help me with our place? You know, in between your day job teaching commercial law working at Morgan Stanley, can you give us some hints. And we loved it. So we wanted to open a gallery.

But that idea didn't get off the ground until we got to Brussels, where the space the physical space - if you can think of the era when Napoleon III re-did Paris, and then, you know,Leopold II said we can do better in Brussels, went to the Congo and took everything and brought it back to Brussels and rebuilt it - just an excess of magnificent townhouses.

When you photograph a low-lying Scandinavian day bed, in a huge, 4 metre high salon in Brussels, and then you take the word Brussels out, just put the picture on the internet and say it's Ampersand House, beautiful, stylish, sumptuous. The photograph, elevated the value of the furniture.

Some movie producer in California would say, well, what's the price on that thing. And we would just ship things to New Zealand or California or someone's doing a hotel resort in Switzerland or something.

So people would visit us from all over the world. And buy pieces that we loved and lived in used taking lamps off the wall unscrewing them, it's a completely meaningless project financially. Except, of course, if you look at what we paid for the house, and to redo the house, and what we made using the aesthetics of the house to upgrade the value furniture, it was a yield play, you could say we're using the income from the house as if we had a tenant looked at that way, and was a way of buying an asset that didn't go down the house itself. And then making money using the houses if you rent tenants, or hotel or restaurant.

Brendan Le Grange 12:03

In some ways, similar to podcasts, and YouTube. And those things where you create the community, you create the beautiful thing that elevates everything else, because it's seen in its best light. And that allows people to imagine what it could be versus grandmother's old chair that you grew up with. And just don't recognise until you see it in the right light cleaned up a bit and photographed well you see okay, it doesn't need to be down on its luck.

Ike Udechuku 12:25

It happens all the time.

In Scandinavia you would get literally grandmother's old furniture has been in the attic. And there are these auction houses which are now online. So you can sit in London, and review all the regional auction houses in Finland by flicking through some pixels. If you have a network of trucks and people who can upholstered furniture as we developed, then you can just say, I'll buy that one. Because as you start to recognise, that's a good example of its type is damaged but I know someone who can fix it. Oh, that one's damaged beyond repair, you could see from a picture because he just trained your eye and you satin physically touch these things.

So it becomes a business husband and wife team. All the businesses we've started have been the two of us. And they've all been a reflection of our passions, for education, for art and design, and finance.

Brendan Le Grange 13:12

I love that as well, that it's not just about the collection. I mean, it's about sitting in the chair and seeing it and let's not get too far off track. I said that was also a point in your career that you sort of moved from working in banks and since then, well, several businesses you're founded with your wife, how did those earlier businesses lead you to Pathway?

Ike Udechuku 13:30

I think that probably the best way to settle on it is, a husband and wife team that are looking at houses and love of the aesthetics, but also a knowledge of the yield.

And so you start to think as an economist, in my case, there are conflicts of interest between landlords and tenants, that landlord wants to spend as little as possible they want the house to go up in value, but they don't really want to fix the dripping tap. There are, you know, houseproud tenants who do work on behalf of the landlord and landlord kind of lets them do it. And a couple of experiences - just so you know, when I first met Kathryn, we're living in Canberra, Australia and in a rented place - I first rented place as I started work at the Treasury and there was some, let's say wallpaper scratchings on the wall from the previous tenants. And I said to the landlord, you're gonna fix that, aren't you? And he said, well, I'll lower your rent a bit. If you go and pick the colour you want, and do the work for me. I won't pay for your work, I will pay for the materials and you get to choose.

In the Pathway concept, the landlord and the tenant buy the house together and the landlord says, well, if you look after the house, I'll give it to you one day.

That's basically it. I'll lower your rent if you do some work for me, or I'll give you a share of the value of the house. If your monthly rent comes in £1,000 £1,000 £1,000 every month and you want to spend money on my garden because I bought the house, I'll skip two months of rent, you go buy the trees you want, put them in the garden, and then we'll talk back to paying rent again. It's really very much about just a trade between a family that owns a house and a family that's looking after that first family's interest.

But then you just change one paragraph in the lease agreement that says, and if you pay enough rent, that's just so much rent over so many years, I'll just give you the house, because that's enough - that social equity comes in a single paragraph, where we say with respect to the house, if you can pay £1,000 a month, I'll show you all of the houses in your neighbourhood where £1,000 a month is good value for money for you.

And it's good money for value for me.

The rent I received, the money, is high compared to the houses. Because if £1,000 is all you can afford, I'll make them all £1,000 a month and then go buy the ones that you want and become your landlord, because we've chosen the house together and chosen to redo the roof and insulate it together. And the economics of reducing your gas bill goes to you. But I'll take that into account, when we said that the value of the house will show you will show you slightly cheaper houses if you also want me to redo the roof, just choosing together and how what works for you what works for me, it's a very different way of thinking about finance.

Brendan Le Grange 15:25

I love that, because as someone who's rented a few times, I've rented more recently in a house, a beautiful house, stunning views, we got it for an affordable price for us because it was in a state of somewhat disrepair. And it kind of worked for us because we had young kids that takes the stress away, they could not do any more damage but you're paying a fortune in heating, its doors don't all close properly, little things that you say, well, I wouldn't mind spending a few £1,000 getting these done but as a tenant, the the owner in our case, and not because they were kind of cold hearted landlord, but because they waiting to knock it down to develop, just wasn't looking to invest for that reason. But yet you have that conflict and there doesn't need to be see both could really have a harmonious relationship and you talk about pathway bringing together the landlord and the tenant, it's also got that financing side.

So I think we will deep dive a little bit more of how you make this work for consumers, because that's where I'm a bit more comfortable.

But before we get there, let's talk about the investment banking side, the funding side - how is this also a play in the pension area? How does this in any way impact how pensions might choose to invest? Or how investors might find different asset classes?

Ike Udechuku 17:06

It's a very good question. And it's worth warning whoever's gonna listen to this, that it's all maths. The Leonardo DiCaprio line in the movie Don't Look Up, when he's asked to explain 'why are you confident this asteroid is going to hit the Earth, but please don't use maths'. And he says, 'well, the probability that hits the earth is all maths, what would you want me to say?'

We just look at bond yields and deconstruct obscure instruments like an inflation linked guilt, and say but how would that instrument be if it was equivalent to rent? It's actually quite useful at the minute - a year ago, let's say the 40 year index gilt held a yield of negative two, and it's hard for people to get their heads around what do you mean by an inflation linked guilt that goes up but the yield is negative two - and we can talk all day about the accuracy of the math, because it needs to be accurate, but at the minute, the yield is zero. So all of the math collapses down to over 40 years, a billion pound investment gives you a billion pounds back, if you ignore the word inflation.

That means you're gonna get two and a half, two and a half, two and a half, 40 times, multiply by thing called inflation.

Then you can look at rental yields in London, two and a half is really low. But yes, you see some wonderful places which have yields as low as two and a half. And that's just like the income only strip on a publicly traded inflation linked guilt, exactly the same, obviously.

So we do that kind of transformation. And people look at us blankly, but when it's zero, then you can say, you know, a billion divided by 40. That's as simple as it can ever get. Otherwise, you talk about net present values.

Then we built a machine that can look at every property in every town, and every picture, and every floor plan, every EPC certificate and say, well, we've noticed when you look at all of them all million properties available for sale and the million that sells during the year and there's still a million left for a couple of million random properties through the internet that residential rental yields are inversely correlated with absolute house prices.

There is a distinct slope downwards as you yield on the y axis and house price on the x axis it slopes downwards value for money, if you have three people renting three one bedroom apartments paying 500 Each these are very low valued apartments even in places like Liverpool, when you add up 500 three times, the 1,500 you get really nice houses in Liverpool, the 1,500 month not in Croydon not in Brighton, but in Liverpool 1,500 is a pretty good number. The value of the house you can rent for 1,500 is more than three times the three individual apartments better value for money. And that's what a rental yield means.

And so I've stopped saying inversely correlated and started to explain to people it's better value for money if you rent a bigger place. Ah, now I see what you're getting at.

So that means that a financial institution that was willing to accept rent instead of a mortgage repayment on the loan and we get a higher yield. If they encourage people to rent the smallest and ugliest place, you know, your yields are gonna go up. And every but-to-let landlord knows this, that if you're living in London and you like walking around to your apartment and doing it up, these are expensive places. So you're gonna invest in something thinking, well, the yields are lower in London, but maybe London will outpace Liverpool in terms of capital gains, etc, but Middlesbrough so these yield differentials persist because the country is fragmented and diverse.

When you have a contract like ours, in which you gently transfer the value of the property to the tenant, there is no capital gain or very limited capital gains. So now the yield differentials are stark: why is it that you can get 30 million pounds per billion invested over and over again, in London and 100 in Middlesbrough, compared to 30 over and over again for two human generations?

I don't think those portfolios are worth the same. I don't think ordinary people (if you took the capital gain away) would say, well, I'm quite comfortable getting 100 in Middlesborough and selling that and getting 30 in London, over and over again for two human generations.

Those properties are not the same. The one throwing out 100 million is worth more. It just is. And people look at you blankly and say how can a an apartment in Middlesborough be worth more than you can buy and sell an apartment and Middlesborough? The answer is, well, it's not, the apartment is completely perfectly priced but 10,000 apartments where the rent is commingled and you've broken that asset into two economic units, one which wobbles around and one which is stable, one is a bond and one is equity, and if you separate them out until the equity, it's like, I'm an M&A banker, right? Broken up companies and sold them in pieces. And the two pieces don't add up to the whole, they just don't.

When you then take the rent and tranche it and this is a repeat of the theme, it take a little bit of time to absorb the simplicity of it.

You know, a family that puts in a 20% deposit is pretty generous for a house. But why wouldn't a bond investor put in the first 20 and another bond investor put in the more secure 80. And the first investment says while I'm taking all the risk all of it, I get wiped out completely before the other investor loses a penny. So I want more than 20% of the rent. And that rental stream can be divided into two, which is entirely normal with a mortgage except the first investor is a family with absolutely everything to risk. Whereas you can find institutions, if you structure it correctly, who'd say I can understand why putting in 20. And getting more than 20 of the rent is a decent deal.

At that point is just math, but the concept very simple, just slice it in two.

Brendan Le Grange 22:37

Yes, taking me back to my university days with structured finance, it is just that simple. It is just the math and you take out the heat the emotion of it. And the fact that the house is what is their future income stream and you say like people are sort of fairly comfortable with the idea in many financial products, but their house is seems to be different.

And I think what's interesting as well is that idea of on the one hand, you've got a huge bank with you know, hundreds of millions of people are highly educated in finance, know all the terminology and the other one, you've got somebody who just wants their family home. And that's an imbalance you can see why the the man on the street is losing out often because the odds are stacked against him. And suddenly you're stacking together and you creating a big portfolio of properties and of renters, suddenly that evens out that

Ike Udechuku 23:21

Absolutely, coordinated like a community organiser, that's essentially what Pathway is, we say to people look you have the amount that you can afford, your neighbour has a different amount, and they have a different time horizon that they want to live next door to you, but when you add up your two amounts of rent, if you can't pay on a day when they can or vice versa, combination of those two people is just more stable.

Multiply that by 5,000 and you got 10,000 independent risks.

It's just a different risk that no one of those people individually can say, I'll just do a whip around my neighbourhood 'how would you like to, you know, add our rent together, create something that's less risky than a normal rent so it can be financed at lower terms in the bond markets?'

No one person can do that.

And to go back to the consumer side. This is probably the most important point: if I was looking to rent a place and I went to www.rightmove.com, mechanically, I would say what do I feel comfortable paying, and where, and I'll be given a list of options. And we just said, just do that.

So if I was going to buy a house, I'd go to Zoopla and within seconds I would say this mortgage calculator indicates I can borrow about four times income and my grandmother will give me £50,000 - add a and b to get c, and look at everything downwards.

In many parts of the country. Your rental yields are above four times income, but you'll only get that by saying the amount you feel comfortable paying divided by the local rental yield is higher than the banks will then do. You enter the wrong number into Zoopla and then you start walking down the wrong street and looking at them. It's that basic that you with our system.

You're holding in your hand a calculator that says you might be able to buy this house, so if Halifax says 400,000 and we say, well, no 650. I mean, the differences are profound. They're not small.

And you discover that within seconds walking around the street, and we want to guide you as you're standing in the garden. And so we'll go upstairs and check out if the roof needs insulating, and guide you as you're perambulating, that's, that's the vision.

It is not about numbers, there's no APIs, SVR, SDLT, or LTV, which is what's that like go and have a look just, this is the thing they're doing up we're about to buy it together. We're about to do this together for 35 years, let's just go do the thing and make the financial services embedded inside that experience, just make it disappear. Make it a sort of it really.

I hope you find the comparison, flattering, but David Brear of 11:FS, his podcast about 18 months ago was titled, 'people aren't really looking for mortgage, they want to buy a house'.

And we sat and listened to it and thought, well, let's just make the whole experience like the finance disappear into a friendly conversation with your co investor. Should we do the roof rack and solar panels or bring the energy prices down for you, you will save money, let's go do that we've got money, all we have is money, we've got a billion burning holes in our pocket with a yield of zero.

Brendan Le Grange 26:18

I mean, on the energy when I spoke to somebody, hopefully interview one day as well, who's trying to get a green energy fund take off the ground. And she said one of the big problems here is if you want to buy solar panels for the house, they are an unsecured loan, you're paying over five years, it's about it's to make my house better and to bring my costs down. The mortgage companies are interested

Ike Udechuku 26:37

Debt consolidation and bringing your energy bills down are the two product pipeline initiatives that immediately get this off the ground. If your bills go down, and you are a better tenant because you're spending less each month, and the value of the house we share mortgages down to only it's a mathematically we own something that's more valuable. Blank does not. And it's we bought the property. So our security interest is perfect. It's not unsecured. We've just bought the house. It's so simple.

Just we make money if it's a better house, even if you've defaulted and we have to sell the house. It's a mortgage free house and we own it. Why would we not want to do it? Oh, and by the way, it's good for the environment. And it's just one transaction, we bought a house, you put up solar panels? Why is that complicated? It's the security interest, the downside, and you have isn't that and the other banks are over complicating it, we just bought a house and did what was right to the environment, saved money for the tenant. We're buddies we're working together.

It's not simple. But it's not complicated either.

Brendan Le Grange 27:36

Like having the rich relatives that we all want. We all want the rich relative we could go to and sort this out.

Ike Udechuku 27:41

The rich relative is not your grandfather, it's other people's grandfathers with their retirement savings. It's the community's grandpa.

Brendan Le Grange 27:48

I love it. Obviously, it is a lot about people. So you've got the investment side, I think it's important to fund this and to show that this is this is something that big finance can can buy into.

But you know, for most people listening, it's easier to interpret at the consumer level. And you've got a lovely little video there that you've produced that shows the the pathway story. And as I was watching it, there's there's a line that says renting while saving to buy is brutal. And it is, it's such a difficult thing to do, and so obviously so that you're paying monthly rent for the house that you're in. And at the same time, the house you wanting to buy is getting more expensive. And you're also supposed to be saving up enough that somehow you can pay 10% 20% down on this house. And it can just feel like a hamster wheel that there's no way off of it.

And that doesn't take a genius to see. It doesn't take 20 years working in lending to see this is something everyone knows bad. It's persisted for so long. So on that point in your video, you say you're making the downpayment optional. And what I want to know is, have we allowed this to persist for so long? And to what are you doing to fix it? How does the Pathway model make a down payment an option.

Ike Udechuku 29:00

So let's preface this by saying we've forming a club to demonstrate how this will work in practice, I'm going to describe the world as I want it to be, as I believe it to be.

And all the math checks out. But there is a behavioural challenge that the institutions who can make it work would like to see precedent. And nothing has ever been invented with precedent. And that's a fairly simple statement. There was no fire before someone decided let's cook with fire. Somebody invented the wheel, there was no Tesla before Tesla.

What we're going to do essentially is to offer people the model that demonstrates the risk that they're worried about as small and then pre assemble the cash flows so that we can turn the machine on very quickly, and then auction it.

It's very straightforward. The auction will clear at a certain price, a price discovery process which involves PhD mathematicians looking at a model that we've built and interrogating it and stressing it and then saying the individuals See 1,000s of them who've been through the preliminary screen, so that each individual atomized component of this independent system has been put through the same rigorous tests that any other landlord would ask people to go through. We've looked at their income, their income patterns, we've necessarily gone through references, but they've done this during that 5/ 6/ 7 year journey when you're struggling to get your deposit and all that's plenty of time for us to say, well, let's spend 5/ 6/ 7 minutes using open banking to evaluate whether you're someone who is a good risk.

And that process the technologies, you know, in 2015, that was science fiction and 2018. The open banking protocols were agreed now way down the track and 2023 and you can buy it on the SAS basis. So we have partners using machine learning and open banking, selling that to us on a per applicant basis. We then plug that into a marketing machine that says would you like to pay rent and have nothing versus adjoining with club in which it's possible, you might pay the exact same amount of rent, but own a property with it'll be worth a million pounds.

In a place like Brighton, property values grew by a factor of six in 25 years. So you take a typical starter home that you could rent, in Brighton you'd probably have £2 million with the property at the end of the Pathway. It's a fairly simple proposition: zero, 2 million obviously that number would be zero to 600,000 in Newcastle because they're enormous variations across the country. But places like Hackney, London Brighton, Bristol, Exeter, huge in places like Newcastle Liverpool, Toxteth Southcenter, just huge variations enormous. It's a very high yields, and different property price rises.

And we just analyse that because the data, if you created a company, and you're trying to guess whether people would default on a credit card, the data analysis is vastly more complicated than looking at rental yields. Because the spread of stable rental yields is enormous. 2% in parts of Exeter, for example, then you slide all the way up to four and 5% in Birmingham, six and 7% in Manchester, and seven and 8% in Liverpool.

And if you look down from the sky at Anfield stadium, the top end is the north and there you'll find yields of 7%, you go around behind getting down to the station 100 basis points higher. If you go to the east, there is a park, so there are no yields. We're talking about that level of accuracy. |The data is there. So it's really you know, if you step back and say, let's look at it from a finance point of view, you can price for risk by taking different risks.

Brendan Le Grange 32:33

And what I love about it as a as a data exercise is that what if just bought a house and you're looking at house prices in the street or whatever, you know, the last time I have sold in the street was four years ago. And then you got to say, well, this one's bigger that one's smaller, that one has a garden that one doesn't. This one's 10 years old, that one's this years old. It's so irregular, that you buy a house and okay you take mortgages more often because people refinance, but it takes 100 houses anywhere in the UK, that's already some of the people have got a mortgage and only some of that recent, but everybody's else is renting and everyone else is renting and they're renewing their rent every year, every two years, depending on their lease - their data is fresh, it's coming through, it's not complicated by all the other changes you might have. And it's just what is the rental for that as

Ike Udechuku 33:13

Cash in, cash out. Transparent, monthly, stable, predictable.

When you look at the value of a portfolio of houses, you're asking the theoretical question, and let's put this in the context of a buy and hold investor like a pension fund. I'm buying an asset intend to hold it for 40 years, the house next door is sold under emergency circumstances by people who are not you. And so your accountant says, well, your asset went down because you might sell it... you have no intention of selling it! And the rent is coming in and the rents very stable coming in and cash auditable. And you don't intend to sell it.

If you own that house as a pension fund, your asset fell. If you owned a bond secured on the rent for the house next door, the identical house where your identical twin is paying the identical rent, your bond value did not go down. Nothing happened. Your tenants paid their rent your retirees got their their pension, you could just ignore these present value fluctuations because they are completely irrelevant if your cash flow matched.

And in the context of pension investing the rules which will allow the pension funds to look at the reality of their risk and model it and go to the regulator and say look, there's really no risk here are all changing as Britain exits the European Union and rewrites the Solvency II rules. The idea of Pathway creates a model that shows the pension fund now that we don't have the Solvency II rules, we can look at cash flow, I have 10,000 people paying 10,000 a month, that's 10 million a month, the likelihood that they won't pay their rent is like 2%. So 10,000 multiplied by point nine eight, the models become bizarrely simple.

When you exit the Solvency II regime, most people don't know what that means. So you need an investment banker whose clients work pension funds to say this is what it means but it's not complicated.

Brendan Le Grange 34:53

Yeah. And what I love about that the whole Pathway concept is that that future reward that route to financial security to sort have social mobility, to some extent has always been the house. And a lot of that's because it's this sort of mixed up world where on the one hand, you're paying rent, it's an expense that gets paid every month for the place you live in, and you get nothing for that, you could pay the exact same money for a house, it gets reported to the credit bureau, so you get better credit in the future, the asset grows in value. So you're building some wealth, and there's tax benefits and things as well.

So all the reward is on that ownership side. And it was hard to switch between the two, even though you're making the same monthly payment for some where you live, getting rid of the down payment, I think is huge on that, especially in a world where house prices have been rising so fast, is their house prices rise, landlords also start raising your rent. Now you're trying to catch up, but you have to go faster, because you need to get 20% more now than you did last year. Taking away the downpayment, I think is massive on that.

The other thing you're looking at, as well as the income caps. Now, obviously, income caps have a purpose in the mortgage lending space. But they are a perennial problem in terms of how the stress test gets done, and you can be priced out or at least forced into dream home plan B, or C or D or worse

Ike Udechuku 36:09

Those compromises are is really where the market is out that a lot of people who have no savings renters, in fact, mathematically was about 40%, before the pandemic and it rose because of pandemic related relief.

But still half of renters have just no savings at all.

And they have credit card debt and other household debt. And then the other half has some savings. And then obviously, when you get to the top 10% have a lot of savings, but it's very skewed.

When you start from a standing start, if you were in the middle of the country with a 5% yield, and you're living in a house worth eight times income, and you take that 5% yield for five years, which is short, safer deposit from a standing start, you've paid 25% of the value of the house you're living in, then the bank's kept the next mortgage at four. So you've paid 50% of the house you're about to buy, to your first landlord, and then you need 10% on top of that.

60% is so much money, that if we just said, look, why don't we just charge you more yield, if you're happy to move into that house. Now, because you're not just flinging money at your old landlord, the maths are really simple at 60% of the house you're about to buy, if you have 10% on top of the half you spent with the last landlord - and people are often living in rental yields of six or seven or eight - so that 5% times five years could be higher because of the inverse correlation. And often you're living in houses which are worth less than eight times income, then that trade off is not exactly one for one. But it's still roughly half the value of the house you're about to buy in cash.

And people struggled to do that.

And then at the point of purchase, if property prices spiked 10% That year, that 10% deposit that you had is no longer enough and you have to make a compromise move around the corner or wait for another year or any number of things. The yields are sufficient. And when you talked about paying the same rent as he would feel about paying off a mortgage, when your rents are long term and indexed to inflation is actually considerably higher.

And those amounts are sufficient for people to rent their way to ownership, it would be possible for me to say look, if I just add up all the rent, and promise I'll pay it for 40 years indexed to inflation, that's much more than the value of house.

Again, I was going to apologise about descending into maths, but if you replay this podcast and just listen to it, the numbers are pretty simple: 5% yield for 40 years is 200% of the value of your house plus inflation. And inflation is currently double digits. So these are very, very large numbers.

And so for someone to take a cold hard look and say, oh, I'll take that amount of money is taking a risk on one family. But if you add 9,999 other families and average it and slice it and crunch it, it's just massively different from taking mortgage risk and massively more stable because of the interest rate sensitivity of a two-year fixed mortgage for five-years fixed mortgage, it's just not the same.

People talk about it in one breath. When we introduced the Pathway concept, it all starts with how does it work for one family? And I take a deep breath and explain. And then they think, ah good, I get that. Okay, so now I'm multiplied by 10,000. No, it's just that it's at that point where you really want to understand how it works for one family, just to make sure 'doe it appeal to the consumer', well, yes, but that's not the risk that we're passing on to the bondholder.

We are essentially doing a consolidation, a conglomerate company with divisions that do different things like the armaments division, sell that to arms manufacturers, take the hotel division and sell that to hoteliers, and they pay different prices. So it's it's really a breakup of a portfolio that that creates the value.

What is the revenue metric? People ask me when I say well, we'll buy a house and then we'll securitize the rent they say so how many people do we want. Well, I don't know. And I do care about the person, but we measure the metric has £5 million a month - so that could be a £1 million house in London or £100,000 pound apartments in Toxteth at 10 times the number of people.

Numbers of people, for the bond market, is irrelevant. Is it 5 million month? Is it not? Is it indexed RPI, CPI, that's important. It's indexed upwards only, that's important. And then the individual tenants have embedded options in the lease. So can you model out the embedded optionality that the tenant can choose to sell when they want?

That makes it sound as though the cash flow stream is short, if you have a breakable tendency, but people often forget to say, we have a straight line transfer of the value of the property bought with zero deposit from zero to 100, you own it in 40 years, or 38 years or 37 years, depending on the value the contract you strike. But if you sold halfway through, we still own the other half. And there is a human tendency of people to want to sell when the prices have spiked, it's probably gone up faster than inflation properties tend to do so. And so we have a little bit of an upward bias in terms of property prices rising. But complete exposure if it falls, because we don't, we're not lending you money, or buying an asset that could go down and we share the down as well as the app and had a stroke.

We've eliminated negative equity.

Brendan Le Grange 41:12

Yeah, well, yeah, there's a few things important. One, negative equity, that's great to take that stress off, then you say, well, I am going to just keep paying, I know it will come back in a year or two or five or ten. I have to keep paying, too.

I think what I want to pick up on here is you talked about the flexibility to be able to sell out and change because obviously houses we grow and upsize and downsize depending on how our life changes. I think one of the risks is people listening to the Pathway model, there's some terminology that sounds a little bit like timeshare, which is an industry that has a very negative connotation with locking people into things forever. And that's not at all the situation.

Yeah, people do have this flexibility that if you started with a small house and trendy part of London, now you've got two kids and you want to move out into the suburbs, or you want to move up to Liverpool, or to Leeds and to get some more space in the countryside - you can do that this is owning a house, you don't have any other restrictions than if you bought a house.

Ike Udechuku 42:02

I think the right way to think about it, put on my Nigerian hat for a second, Nigeria is a majority Muslim country, Imy family comes from the Ibo part of the south east, so a Christian region, but if you had a Sharia mortgage, you would essentially be saying the bank would, in its own name, acquire a property in partnership with you - you've chosen the house, the bank holds it in a trust for you, you get to treat it as your house, you have to insure it and maintain. So you can paint the walls and plant the trees in the garden, then the bank would say, 'can you pay me rent because I actually bought the property for you'.

And Sharia mortgages tend just not to be indexed to inflation. So we slipped in 'index linked'.

And then we essentially said, well, if you got rid of the downpayment, so of the deposit, so you can just start at zero, we would allow you to do a straight line transfer of the time, 38 year arrangement. Last time I checked this, like 19 years is halfway through. So you can have a conversation with someone in which you can say, well, 19, how old are your children in 19 years? And is that about the right time when you might want to try it out? So we know with precision, that the end of year 19, your share will be half because that declining balance thing that I can't describe in a podcast is too complex.

People buy mortgages with no real idea in year seven and a half. How much of a mortgage to pay down if it's a two year fixed and reverts to standard bearer? Why do that? Why not just say halfway through your own half.

So now we can say with precision, we're sharing the up and the down. Property prices tend to drift up, so we're just gonna say we probably make some money. It's enough. And we'll also be able to say, well, on the afternoon of the 14th of September in the year 2043, you're 20 years on from now, September, 20 years and six months, and then the original contract was 32. So we took 23 divided by 32. That's a lot of words. Try saying that in declining balance terms is just more words at the moment.

So we can put a little slider in to gamify it, to show you this house on this specific day, and then the next little sinuses, but that houses in the region that grew 2% faster than inflation over the last 25 years. What if they grew 1%. So you'd know the exact percentage of an unknown thing, but it's not a weird thing. It grows or shrinks.

So the slider is a negative number. Imagine you had nothing. And then now you want 50% of something which fell 20%. It's not nothing 50% of something started off with £300,000. It fell 1% a year relentlessly for 20 years. Rarely happens, but it might. that you want 50% of everything that's in real terms worth £200,000 That's £100,000 you wouldn't have had, but you nudge that slider from fell 1% a year for 15 years to grew 1% a year for 15 years at 2% difference or something that rises 2% over 40 year Pathway goes up by a factor of 2.2

A £500,000 apartment in Croydon will be worth £1,000,000 in 40 years time, if it grew as fast as the British economy. So when we do that math, we gamify the process by saying to people, well, you could put in nothing and pay us a 6% yield. If you have a lifetime ISA you would use that money and put in a deposit because the government's going to sign a check and give you an uplift.

And you'd be mad not to use that.

If the money is coming from your grandmother. There's no tax difference between putting in money to shorten your pathway on our system, or using it for your honeymoon, there's just you choose, or you could redo the kitchen. So all of a sudden, it doesn't sound like a natural product. We're giving you options about whether we put in all the money or you put in part, or any combination of the two.

But if we have 10,000 tenants, how are you going to redo the kitchen will say, I know somebody can retrieve kitchen, because I've got 10,000 tenants, let me help you with that. Oh, you want me to put in more money to redo your kitchen? Well, I'm about to give you £250,000, what if I add another 25? It's 10%. Yeah, I think you're good for the money, because they just did an algorithmic assessment of your ability to pay using open banking, and I can see good for the money.

So we're now saying, let's own this house jointly together. And we will do everything we can to make sure it is the best house, it's good value for money, that we insulate the roof that we put solar panels up there, if that makes the heating bills come down, then we say well, you get the benefit of heating bills. The turnaround time, this is probably the sweet spot of the perfect system. If you eliminate your energy bills, that's an enormous percentage of your rent, like £3,000 or £4,000 of energy bills and a big house, or your rent might be for a big house £30,000 was 10% of your rent. If we just eliminate that by redoing the house, you save money when we get repaid, oh just a little bit. Or let the Pathway that was 32 years drift out to 33 or 34 or 35 years depending on the ratio between the amount we're putting in and your willingness to pay or any combination of the two. Any infinite variation between a raise my amount per day a little and a little bit longer a little.

So we just gamified just two little sliders, infinite variations of personalised financing, that mass customization is so much easier financial services where it's just numbers and not physical materials.

Brendan Le Grange 47:36

Yet, it's so much easier.

And it's the thing you when you talk about it like that, it just makes so much more sense. Yeah, if you contrast that to the rental situation, that you're just paying rent, and it just keeps going to somebody else. And every now and again, you change houses. And if you want a better kitchen, you've got to move to more expensive house and pay that and pay that it's such a pleasant path to ownership.

And I think that the the lifestyle benefits are clear for consumers, but even for communities are massive. And the more people that own their houses, the better the community is, it's a well established fact, in economics, just in terms of all the antisocial behaviour and stuff all is improved when people are in their houses, they take more care of the public land as well. And they feel invested in communities. That stability to stay in the same area, go to schools, own those properties is huge.

And it does feel like things like down payments on houses have been keeping people out of an investment that sure there's some mortgages that that default.

But if you think about the underlying asset, long, long histories of becoming more valuable, people always need somewhere to live. Other than you know, some areas will go up and down. But the amount of scrutiny that you go through for a mortgage is exceptional for how little the credit risk of the individual really is in the grander scheme of things.

Ike Udechuku 48:53

Probably just to end by zooming out a little bit, literally on the map. We start our process to make a financial services feel like you're searching Zoopla and Rightmove, we only asked two questions for our underwriting process, two fundamental questions: how much do you feel comfortable paying? And where would you like to live?

And in those two questions, if you analyse the data, you know, what's the normal yield in that area? And by area, I mean, granularly do you mean around the corner where it's a new build, or on the street where there are three bedroom houses? If you tell me that specific house, there's 100 basis points of yield differential.

And the data allows you to define neighbourhood as I would like to live on a leafy street, and I want it to be this close to the tube station and near that, that school. And we have that conversation, human being to human being with the applicant, and it takes a few minutes. And that's like 100 basis points swing and the yield. And then you look at at mortgage bank saying well if I just stick to the best people with all the catch them then I can price my mortgage up, you know, 15 basis points. We just talk to people and say well, the yields are higher over there. I'd recommend you go with lower, because it's better value for money.

You say that. And then you say, Have you thought about insuring your house, I know bloke or panel of insurers, you know, they're gonna give me a kickback. If I put that 10,000 times my cost of customer acquisition plummets, because I'm fluidly helping you, at the point of move. Think about how you want to do the house where you want to live, guide you to value for money, that human conversation happens, because a human being talks to a human being sitting in front of some data.

That's the future financial services.

Brendan Le Grange 50:32

That's enough as a standalone business, whether you have a free house at the end or not, you notice it more when you travel maybe, but if you think of a place like London, there's just so many neighbourhoods, maybe there's a neighbourhood that fits my needs, I've not heard of just around the corner, equally close to the tube station. But it's a different line with the other side of the circle, and having access to all the things that when you buy the house, as all the things that come with it is great enough, in the end, you get given given the house.

So I think for consumers, there's a lot of clear incentives, sure, the financing may be a bit complicated for them. But for the investors, that's easy. That's bread and butter, they're very used to that. The two parts don't necessarily need to fully understand each other. But both parts are equally clear to the right audience.

If somebody listening is interested in learning more about Pathway and maybe even getting involved, what's the place for them to go to learn more for them to sort of have that conversation and see what it's about for themselves in detail.

Ike Udechuku 51:37

For people interested personally, or investors want to understand how we're going to build an extremely valuable consumer facing business, our site is being built in public, we prefer to do things open. So you will see the typos, you'll see things change and ready. And it's called thepathway.club So the pathway dot club.

And for people who want to understand the, let's say, the more professional investor, bond investor side. If you look at Ike Udechuku on LinkedIn, I try to post an article that deconstructs the inflation linked bond yields every day and just saying to people look, this half trillion pound niche gilt market, the inflation gilt market is not that obscure, it's big, and it's transparent, and real price properties in relation to that benchmark. And just just just describe what people will see when they dig a little bit deeper.

So LinkedIn and website.

Brendan Le Grange 52:30

Perfect. I'll put those links in the show notes as well.

The bond markets, I guess in some ways, are just based on tax incomes from a million different earnings of consumers are very similar once you filter out who's who's doing what, but Ike, thank you so much for your time. It's been great.

And so said before we started recording, I know there's a lot of innovation happening in the mortgage space, because it is such a desperate problem that people can see well, how can I, as somebody who pays money every month to live, not pay that for a mortgage, why there's so many of these barriers that kind of dragged over from 20/ 30/ 40 years ago. I mean, my parents would have been having the same problem to buy their first house. And a lot of the innovation that's there is making a little bit easier, it's making it a little bit easier, a little bit easier, there maybe taking a little bit of money off.

But I think that the Pathway model is so bold, that it's proper reimagining of what this needs to be and, and it's not just a consumer facing business - with all the negative news or the cost of living crisis, that is finally a way to relieve some of that stress.

Ike Udechuku 53:44

At the risk of running over time, our platform asks, 'what do you feel comfortable paying' The banks cap mortgages at four times and you're living in a house with eight times income, try plugging in 60% of your current rent and see what you can buy for 60. Just within seconds, you'll see places with no deposit. And then you decide it's not it's not about getting the rent up or getting more money from us. We're getting a yield whether we lend half a million to a middle class family, as we'll do £250,000 to two separate people. So you can just decide I want to cut my rent and own and have no deposit just do that just

Brendan Le Grange 54:21

It would be a difficult enough question with 'or' in there, do you want to cut that or that or that and you're able to do 'and', and and and.

And I love the terminology that sort of how much we're comfortable to pay because, again, it strips away some of this terminology and things that makes homeownership unattainable. I mean, obviously, the biggest things are are the actual finances that you have to pay down but the terminology doesn't help all that sort of barriers that make you unsure of which mortgage to take unsure of how you're going to repay and unsure of, you know, what's happening in the mortgage space maybe is a little bit better controlled, but in financial services in general, people can make the wrong product choices, because they don't understand and how much you're comfortable paying, people can sit down and say, Honey, how much are we comfortable paying, put a number in, and see. And as you said, That's it.

When I bought my first house in South Africa, my, my wife, my brother, and I bought a house together, we got 108% mortgage. So it was enough to buy the house, to pay for the fees of buying the house and to buy furniture, that doesn't exist anymore. And so when you buy a house, you've got all the expenses of the solicitors, the surveys, the new house, how you want to furnish it, maybe and fix up things that are falling down.

So even the people who have got money saved for a down payment, they can choose,

Ike Udechuku 55:40

They can choose 108% or 92%. You know, within reason.

An algorithmic analysis of whether you are comfortable paying the number you say you're comfortable will allow us to say, well, then we'll give you what turned out to be 120% of the value of the house. If that 20% reduced your gas bill to zero, you're a better tenant. If we take your 30% credit card debt away and say, can you pay me back in 32 years, your monthly outgoings go down, you're a safer tenant, we'll figure out whether you've got enough money to pay us 32 years from that, because we tacked it on the end just so much flexibility. When you look at the people's life, you know, in totality?

Brendan Le Grange 56:21

Well, okay, I think it's one of the most exciting projects I've had on here. So I'm definitely going to be watching

Ike Udechuku 56:25

As a South African, you'll be pleased to know that in the mid 80s, when I was working for Morgan Stanley, I went to Johannesburg and heard about an offset mortgage in Africa and people running around thinking how can we move money around electronically in Africa? Those are the first times those FinTech concepts and product information concepts came to me and I was a big banker in London in Europe, so wasn't unsophisticated. So a lot of this innovation comes out of, you know, just raw human need from all over the world.

Brendan Le Grange 56:53

Necessisty finds a way but yeah, congratulations. I think that's a fantastic idea. I think that the stuff that people do dig into, to understand the numbers is a little bit intimidating, maybe to think of, but as soon as you get into the math, almost wise, nobody done it before. And thank you again for your time,

Ike Udechuku 57:09

Brendan, it's been a pleasure and an honour and thank you, thank you very much for the invitation.

Brendan Le Grange 57:14

And thank you all for listening. This show is written and recorded by myself Brendan Le Grange in Brighton England, and edited by Fina Charleson of FC Productions. Show music is by Iam_Wake and you can find show notes and written transcripts at www.HowtoLendMoneytoStrangers.show

And I'll see you again next Thursday.